Blog - Investing Notes

Blog Synthesis: The Wisdom of Analysts, Experts and Gurus

Can analysts, experts and gurus really give you an investing/trading edge? Should you track the advice of as many as possible? Are there ways to tell good ones from bad ones? Here is a listing of past blog entries investigating the value of expert advice:

The Value of Financial Advisors? ...on a risk-adjusted basis, diverse groups of self-directed and advised investors perform about the same, with alphas close to zero.

Classic Essay: The Foolish, the Theoretical and the Practical ...it seems that nature to a significant degree favors diversity over survival of the fittest.

Regulations Suppressing Analysts' Earnings Optimism? ...Regulation FD and the Global Analyst Research Settlements helped reduce earnings forecast bias by neutralizing conflicts of interests for equity analysts.

Beware the Favorite Investments of Stock Market Gurus? ...investors should beware of the favorite equity investments of stock market newsletter gurus. Many favorites may be swing-for-the-fences speculations.

The Timing Performance of Expert Futures Traders ...expert futures traders exhibit some market timing ability, and those who employ trading systems out-time those who do not. Market timing is more important to futures traders than securities selection.

Do Stock Recommendations on Blogs Have Value and Move the Market? ...trading activity in stocks recommended by bloggers indicates that on average the recommendations (especially sells) have some real value and lasting market impact. Blogger credentials appear to matter.

Filtering the Luck Out of Mutual Fund Performance Data ...dramatic growth in the number of actively managed mutual funds has driven the proportion of truly skilled funds down, without commensurate reduction in average fund fees and expenses.

The Wall Street Journal's SmartMoney Fund Screen ...the Wall Street Journal's SmartMoney Fund Screen column may have value for picking international and hybrid mutual funds. It is probably not useful for picking domestic equity, sector or fixed income funds, for which strong past performance does not persist after publication.

Comprehensive Overview of Research on Equity Analyst Forecasting ...this paper provides a comprehensive and organized overview of past research on equity analyst inputs, processing and outputs.

Reliable Outperformance Among Bond Fund Managers? ...past performance is significantly indicative of future performance among bond mutual funds.

Analyst Ratings: Levels or Changes? ...investors may find edges by considering both the levels of and changes in analyst stock ratings, with the combination more powerful than the separate indications.

Invest Like the Ivy League? ...investing like the Ivy League means a contrarian emphasis on small growth factors with heavier than average use of hedge funds and private equity funds.

The Most Widely Considered Guru Opinions? ...Bob Brinker, Jim Cramer, Ken Fisher, Bill Fleckenstein, Mark Hulbert, Louis Navellier and Steve Sarnoff appear to be relatively influential among investors at large.

Does Accurate Forecasting Get Attention? ...there is no clear relationship between the forecasting accuracy of and the attention paid to stock market gurus. It seems that other factors drive attention, which tends to concentrate on a relatively few gurus.

The Stock Picking Expertise of the Business Media ..."neither journalists nor their informants can systematically and accurately predict stock prices."

Should the "Anxious Index" Make Investors Anxious? ...the "Anxious Index" from the Survey of Professional Forecasters is of no use in predicting future U.S. stock market behavior. Instead, the stock market is somewhat predictive of the behavior of economic forecasters.

Slim Pickings Among Stock Picks of Columnists? ...the buy recommendations of columnists in prominent business magazines on average underperform an equal-weighted benchmark over the weeks, months and first year after publication. Columnists in Forbes tend to outperform those in Business Week and Fortune.

Finding the Sources and Methods of Financial Expertise in a Haystack ...the difference between expert and non-expert performance in investing and financial forecasting is small, making it difficult to discover the nature of financial expertise. Tests of expertise must be realistic.

Do Finance Professors Believe in Market Efficiency? ...finance professors generally reject the value of technical analysis and mostly reject the value of public information in predicting stock returns, but they accept the importance of private information. However, about one fifth of them adopt investing goals that disregard their stated market efficiency beliefs.

Professional Economists Forecasting Stock Returns ...professional economists lose to simple models in forecasting stock market returns.

Do Investors Fairly Value Stocks of the Most Admired Companies? ...investors may systematically undervalue the stocks of the most admired companies.

Hiring and Firing Investment Managers ...the sponsors of retirement/endowment plans show little timing ability in hiring and firing investment managers. There is some evidence that more sophisticated sponsors (of large plans and of plans that invest internationally) make better decisions.

How Well Do Experts Time Trades of Individual Stocks? ...Australian stock fund managers on average exhibit no timing ability in executing trades of individual stocks, but some managers do consistently outperform others.

The Most Widely Considered Guru Opinions? ...media exposure, rather than forecasting accuracy, probably drives investor/trader attention to stock market gurus. (So why does the media not feature the best forecasters?)

Gurus Explain Why They Were Wrong About the Stock Market ...The top ten reactions, from the bottom...

How Finance Professors Invest ...finance professors are mostly passive investors, but even those trying to beat the market clearly prefer popular investing indicators over formal ("academic") valuation and asset pricing models.

Why Gurus Go to Extremes ...forecasters trying to beat other forecasters tend to take extreme public positions that reflect the motivational bias of competition. An investor considering the public forecasts of gurus should probably shift asserted probabilities away from 0% and 100% toward 50%.

The Diversity and Persistence of Quacks ...naive customers for services with outcomes for which it is hard to distinguish skill from luck will attract and sustain a diverse set of quacks.

Buy Stocks of Companies Experts Hate? ...the stocks of companies least admired by the ostensibly well-informed may well outperform the stocks of the companies most admired.

"Media"ting Your Portfolio? ...journalists amplify the attention bias of individual investors, especially for sell recommendations. (German financial) journalists show predictive ability in their (1) sell recommendations and (2) buy recommendations for value stocks and positive momentum stocks.

Can Real Estate Experts Provide Reliable Advice for Commercial Property Investing? ...it is doubtful that commercial real estate experts can accurately forecast returns from investments in commercial properties by type or location.

The (Dynamic) Meanings of Buy, Hold and Sell ...lead underwriter sell recommendations may be the only analyst calls worth tracking.

Reader Questions/Critique Regarding Motive and Approach ...Results are not conclusive that any individual guru has special ability to forecast market direction. The average accuracy is around 50%, and the distribution of individual gurus about the mean is possibly normal. A series of coin-flipping experiments might produce similar results.

How Investors Do (or Don't) Take Advice ...the difficulty of successful investing/trading probably makes many investors/traders underestimate their own knowledge/abilities and overestimate the knowledge/abilities of advisors.

Any Excess Returns from Investment Newsletters? ...newsletters on average offer investors/traders average performance, without the broad diversification benefit of mutual funds.

Are Individual Investors Entrepreneurs? If So... ...the persistence of success among some serial entrepreneurs demonstrates that success is not all luck. By similarity, investors/traders who persistently outperform their peers likely have skills in developing superior information about the market.

Reader Question on ICLUBcentral's Investor Advisory Service ...investors considering the Investor Advisory Service should perhaps ask ICLUBcentral for substantiation of their outperformance claim and evaluate their record carefully before subscribing.

Reader Question on StarMine and Investars Research Analyst/Firm Ratings ...the StarMine, Investars and Zacks ranking/rating services are probably of only marginal value to individual investors. We see in-depth company/industry knowledge (to the point of ability to critique analyst reports) as most important to successful stock picking.

Holding Court with Stock Market Gurus ...investors/traders should consider a courtroom-like discipline in determining the value of a guru's advice. It may be that very few stock market gurus would qualify as expert witnesses.

Stock Picking in a "Fruit Fly Lab" ...knowledgeable humans applying sophisticated programming techniques can beat the market.

Stupid Timing Tricks ...if your managed account outperforms (but still loses money) in bear markets and underperforms in bull markets, you might be paying for arbitrary market timing.

Do What the Company Does? ...firms sell (buy back) company financial assets when their stocks are overvalued (undervalued), and analysts misinterpret or underreact to these actions. Investors should focus on the actions of corporate executives and not the forecasts of analysts.

Seer-Suckers, or the Efficient Everything Hypothesis No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.

Expert Political Judgment: How Good Is It? How Can We Know? (Chapter-by-Chapter Review) Making the very small leap that these insights apply also to experts in economics and financial markets, we offer here a chapter-by-chapter review of the insights in this book:

The Secret Ingredients of Top Analysts? ...industry focus (depth) and general diligence (timeliness) produce superior analysis.

The Value of Investment Newsletters? ...the aggregate market timing ability, positive performance persistence and stock picking ability of investment newsletters are unimpressive. Finding good gurus, able analysts, is no easier than identifying solid stocks.

Indicators of Persistent Fund Manager Outperformance ...persistent outperformance in investing depends on the hard work of developing and applying valuable private information, not on reacting to what everyone else knows.

Finding a Use for Analyst Price Targets? ...analysts are good for identifying the relative strength of stocks within sectors in which they are experts, but not for forecasting macro factors that drive sector and overall market movements.

Aggregate Analyst Sentiment in the Long Run ...aggregate distribution of analyst recommendations is a coincident or lagging stock market indicator, and those firms that appear to be most realistic (honest) with their distribution of recommendations provide the best advice.

Regulation FD: Have Some Big Shots Lost Their Privileges? ...Regulation FD has helped level the playing field for analysts, and likely also for investors/traders.

Buffett's Track Record: Luck or Skill? ...Warren Buffett's consistently high level of outperformance challenges the Efficient Markets Hypothesis.

Brokerage Business Biases Analysts ...conflicts from the brokerage business (not investment banking) play an important role in shaping analyst forecasting behavior.

Earnings Guidance Lags the Market? ...while there is a weak negative correlation between aggregate downward earnings guidance and monthly stock market returns, the stock market probably leads the guidance.

Building a Good News Inventory? ...stock analysts exhibit predictable underreactions in revising earnings forecasts. The degree of underreaction increases with the earnings forecast dispersion.

An Out-of-Sample Test of O'Shaughnessy's Cornerstone Strategies ...past outperformance is no guarantee of future outperformance. Data mining may tease out unrepeatable anomalies. Structural market changes may reduce the value of old data.

Regulation FD is Working? ...research results indicate that Regulation FD has leveled the playing field for all investors, and reduced the accuracy of sell-side analyst earnings forecasts.

Expert Overconfidence? ...expertise does not mitigate bias. Even highly experienced investors/traders should consider measuring their estimation errors for related tasks to calibrate their judgments.

Do Stocks Ever Hit Analyst Target Prices? ...analyst stock price targets are not good predictors of actual stock price potentials. Analysts exhibit this poor performance because they want to express optimism about the stocks they cover and have no compensation incentives or public accountability related to stock price targets.

What It Takes to Drive the Big (Hedge Fund) Rigs... ...smart young (hedge fund) drivers wanted.

Trust Me, It's a Great Stock ...if you consider analyst recommendations when picking stocks, you really should check for investment banking conflicts. Better yet, just ignore the analysts.

Can the "Experts" Help You Beat the Market? ...portfolios built using aggregate analyst recommendations may produce gross outperformance, but transaction costs absorb excess returns. Moreover, privileged investors get the jump on analyst-driven trades.

See also Blog Synthesis: Mutual Funds and Hedge Funds and Blog Synthesis: Buybacks and Secondaries for past blog entries that relate to fund managers and corporate management, respectively, as stock market experts. See also Guru Grades for assessments of the forecasting ability of various investing experts.

In summary, recent research indicates that the average "expert" has little to offer individual investors/traders.

Finding exceptional advisers is no easier than identifying outperforming stocks. Indiscriminately seeking the output of as many experts as possible is a waste of time. Learning what makes a good expert accurate is worthwhile.